From Beckley, With Love

Dec 11, 2009

By Lee Buchsbaum

In 2004, the headlines of regional southern Illinois newspapers were filled with a mixed sense of hope and cynicism when a new company called Steelhead Development, a subsidiary of the Beckley, W.Va.-based Cline Energy and Development Group, majority owned by Chris Cline, announced plans to construct a large mine-mouth power plant and the first new underground mine in Illinois in decades.For years Illinoisans, especially southern Illinoisans, watched the sad decline of their major industry: coal mining. The passage of the Clean Air Act Amendments and other environmental legislation put thousands of Midwestern miners out of work as power plants nationwide switched away from high-sulfur Illinois Basin coal. One by one, the old stalwarts such as Old Ben, Freeman, Peabody and Ziegler shuttered operations. Arch Coal moved out west and CONSOL retrenched in northern Appalachia. The coalfields grew ominously quiet.Few were surprised when, in 2005, faced with fierce environmental opposition, Steelhead scrapped its power plant ambitions. It was what happened next that was so unexpected: Instead of folding and going home, as so many other upstarts had done, Cline sold its reserves to Natural Resource Partners LP, which in turn leased them to another Cline subsidiary, Williamson Energy, to develop the planned Pond Creek No. 1 longwall mine. With earthmoving actually under way on this vast project, Illinoisans began to hope that maybe this was the turning point. Nearly six years later, it’s pretty clear it was.In fact, since 2003, Cline Energy and Resources Group had been quietly but actively—as is its way—evaluating and then later buying, selling and leasing various tracts of prime coal reserves throughout southern and central Illinois. The pace of development accelerated after the Cline Group sold controlling interest in all of its central Appalachian (CAPP) holdings to Magnum Coal, which was later acquired by Patriot Coal.Between 2004 and 2009, Cline continued to acquire substantial coal reserves throughout southern and central Illinois. Today it owns or controls in excess of 3 billion tons, scattered about half a dozen counties in two major coalfields. To extract and monetize that coal, Cline has been working first to permit and now to construct two other greenfield longwall complexes, Sugar Camp in Franklin County and Deer Run in Montgomery County. In between, Cline took time out to purchase and then rehab the former ExxonMobil Monterey No. 1 mine, now known as Shay No. 1. It is likely that in the next 18 to 24 months, all four of these mines will be ramping up toward a total production of between 20 and 25 million tons per year (tpy), and some industry analysts speculate that this is just the beginning. “By exiting CAPP, and entering the Illinois Basin early, you can make an argument that Cline is three or four years ahead of everybody else in reserve acquisition and using state-of-the-art longwall technologies,” said JohnHanou, analyst and vice president, Woods-MacKenzie.Bottom line is that the Cline Group’s massive build-out in Illinois may create a sea of change for the coal industry as a whole, and Illinois in particular. As CAPP coal production declines and mining costs increase, less expensive Illinois Basin coal is poised to flood the thermal market. While West Virginia and eastern Kentucky operators fight with environmental groups and federal regulators, Cline is suiting up to duke it out with whoever’s left standing.

Moving at Mach SpeedLocated north and east of Johnston City, Cline’s first mine in Illinois began slope development in 2006 and produced just over 100,000 tons that year. In 2007, Pond Creek, under the management of Mach Mining, another Cline subsidiary, produced 1,073,763 tons, the first time more than 1 million tons had been produced in Williamson County since 1995. Mining coal out of the 6.5-ft thick Herrin No. 6 seam at an average depth of 460 ft, Pond Creek has been characterized as a “first class Cadillac of a mine and a coal factory,” producing at costs estimated at less than $25 per ton.Surface construction at Pond Creek began in October 2005. The Mach miners completed challenging slope development work in less than nine months. The mine uses a single entry 3,600-ft slope approximately 25 ft wide and 10 ft high. Coal is hauled to the surface on a 72 inch 2,000 PIW slope belt powered by four 1,000-hp, variable frequency drives (VFDs). Pond Creek employs two continuous miner (CM) sections to conduct standard three-entry development for the longwall panels. Using two Joy 12-27 CMs, three 10SC32B shuttle cars per section, Fletcher CHHDR Bolters, development averages 120 ft per day. “Pete Hendrick, the former mine manager at Mach who spec’d its equipment, is a forward thinking individual who has pushed the equipment manufacturers to design better equipment,” said Dennis Conner, a sales engineer with Joy Mining Equipment and the incoming president of the Illinois Mining Institute. “Many of his ideas have been put to test and faired very well.”Cline mined its first coal out of Pond Creek in October 2006 and longwall operations commenced in March 2008. The longwall consists of Joy 7LS02A shearer, and a variety of Bucyrus-built roof supports, AFCs and stageloaders. The mine’s initial 18,000 ft long, 1,250-ft wide longwall panel contained approximately 8.3 million raw tons. Even with the longwall in operation only nine months, Pond Creek still was able to mine more than 5.4 million tons of clean coal in 2008.With 166 total employees, this makes the Mach mine one of the most productive underground coal mining operations.While driving the slope and main entries, Pond Creek has installed a tremendous amount of roof support. “It’s absolutely first class compared to other Illinois longwall mines. Cline uses the best equipment money can buy. They don’t skimp on anything. The underground working environment is just beautiful,” said one well-placed source.During the 12 months ending September 30, 2009, Mach Mining LLC has become the third largest producer in the Illinois Basin mining 6.09 million tons, 52% higher than the 4.01 million tons produced during the prior 12-month period. Pond Creek’s first longwall move took roughly one month until they were in position at the second panel on March 10, 2009. The same size as the first panel, as of June 1, 2009, the face had retreated 5,100 ft, averaging 101 ft per day.Pond Creek’s state-of-the-art longwall is designed to operate three eight-hour shifts per day, five days per week. After watching them load their second unit train of the day, one afternoon in November, an observer commented that Mach functions like an amazing coal factory, churning out more coal every day while supporting the entire Cline build-out with the cash flow they generate.

Cline’s Marriage with Monterey Yields a ShayIn January 2009, while Cline was permitting Sugar Camp and moving forward with its plans in Montgomery County, Macoupin Energy, an affiliate of the Cline Group, acquired the closed ExxonMobil Monterey No. 1 mine in Macoupin County when attempts to purchase it by Carlin Acquisitions fell apart at the end of 2008. Almost immediately Cline turned around and sold the property, reserves and infrastructure to Natural Resource Partners for $143.7 million. Renamed the Shay No. 1 mine, NRP expects it to produce at a 3 million tpy rate starting in 2011 with a 30-year lifespan based on permitted reserves. Though operated by ExxonMobil as a longwall mine, Shay will operate as a continuous miner mine only.After being non-productive for almost two years, Cline has had to perform extensive rehabbing throughout the mine and surface facilities. While developing Shay, Cline moved into a higher sulfur part of the seam. Redevelopment began at a feverish pace almost immediately. To meet their deadline, Cline’s crews were eventually working seven days a week at the site, particularly in the prep plant, which was extensively overhauled. In the confined space of the older plant, workers were practically stepping on each other as they performed welding, electrical and pipe work.Over the years, the coal’s sulfur had eaten up a lot of the steel in the rusty old prep plant requiring greater investments than initially anticipated. Throughout the summer, workers replaced much of the prep plant’s machinery, installing new shakers, vessels, sumps, and chutes. All of the pumps are either new or re-tooled and many of the coal driers have been replaced. Much of the concrete has also been replaced and all of the railings have been rebuilt to code.Below ground, “before they could recover equipment or anything else from their old working areas, Cline had to take care of some seals first that MSHA had some concerns about,” said a source. Shay is currently operating with one continuous miner unit with the goal of adding another in 2010 and eventually ramping up toward 3 million tpy. Though not yet reported by MSHA at the end of 2009, Shay is producing limited amounts of coal. According to another source, Shay started bringing raw coal to the surface and stockpiling it on the ground in early October. Today the prep plant, which may be able to process up to 700 tph, is functional as well.

Next Stop: Sugar CampLocated northeast of Benton and close to the intersections of the Franklin, Jefferson and Hamilton county lines, Sugar Camp may be Cline’s most ambitious operation in Illinois with its gigantic prep plant being built to support several longwalls at once with coal eventually originating from more than one mine.Scheduled to be in or near full production in 2011, Sugar Camp, also known as M-Class Mining No. 1 mine, will likely produce 7 to 8 million tpy from the Harrisburg No. 5 and Herrin No. 6 seams. Sugar Camp’s reserve block, some 560 to 600 million tons, was first owned by U.S. Steel and later controlled by Old Ben, but never mined. In its permit, Cline stated that the reserve contains approximately 326 million tons of No. 6 and 231 million tons of No. 5 seam coal spread over roughly 37,000 coal bearing acres. At a February 2007 public meeting, James Morris, at the time vice president of the Williamson Energy Development, said Sugar Camp could eventually provide 350 jobs.Shaft construction, performed by contractor Cownin & Co., hit the first coal seam in September 2009. During slope development, the mine suffered a roof fall that forced them to change their plans. Eventually to shore up the balky roof, workers performed normal developmental mining and bolting, followed by a second crew who concentrated on setting up arches and cribbing. A third crew then came in and poured foam on the top, sealing it further. But with the No. 6 seam laying between 585 to 815 ft below ground, Sugar Camp’s slope had become so long that the mine created an unusual switchback midway through it. Approximately half way down the slope they mined a large turn around area and reversed direction 180º and drove another 2,500 ft down slope to the coal, which they intersected just before the Thanksgiving break. The entire slope distance is roughly a mile in length. “This was done so they could reach the coal that is below the mine property. They are considering a second longwall at Sugar Camp and will reach it by developing off the turn around room,” said one source very familiar with the project. If so, the mine’s production capacity could double to 15 million tpy.The adjacent rail loops and 275-ft silo, now under construction, are being built on the east side of the public access road and the Canadian National/Illinois Central (CN/IC) main line, directly across from the mine. The rail load out is also strategically situated just north of a junction of CN/IC’s east-west main line to St. Louis, and close to a connection with the Evansville Western line that will take Cline’s coal to its proposed Mt. Vernon, Ind., river port.The framed up prep plant is really going to be two separate processing plants, known as section A and B, with a planned section C to be developed in 2011. Section A is virtually complete, while workers are finishing up with some additional sheeting and covering work at B. Two large belt lines are also being prepared to take washed coal into another silo to be belted across the highway and railroad to the loadout. Contractors working under Coalfields Construction, another Cline subsidiary, are responsible for most of the development.At press time, several of the primary belt lines are starting to come together as workers finish building head houses on top of the raw coal silos and some “detail” work is completed in the prep plants. The current plan calls for a March 2010 completion date with coal being run through the new plant in early spring at the beginning of the second quarter.“Mach and Sugar Camp are being constructed as first class facilities that will produce for many years. As others may build-in more cautiously, Cline appears to be building for the future,” said Conner.Though the construction site is still buzzing with activity, according to one iron worker “things are starting to slow down as Cline is sending guys to Hillsboro. But between Deer Run’s two sectioned processing plant and Sugar Camp’s sections B and C—which may be used for another new mine, we’ve been told that there’s still at least three years of work out here.”

A Sweet Reserve, Hillsboro Energy and Deer RunOn June 11, 2009, regional news outlets reported that ground and roadwork had begun for Hillsboro Energy’s Deer Run mine, located in Montgomery County and the first new mine in the Springfield area in nearly 30 years. Two months later, the Illinois EPA awarded its final Section 401 permit to the operation, much to the delight of Dwayne Francisco, president, Patton Mining, which, like Mach, will mine the coal on a contractual basis for Hillsboro Energy LLC.According to long time Illinois coal industry veteran, Rodger Dennison, vice president, Hillsboro Energy, “we see more than one mine in this area,” the first being Deer Run. “The reserve in neighboring Bond County is huge too, but we’re concentrating our efforts in Montgomery County where we might build up to three mines. All the reserves that Cline controls from I-55 east will be longwalled.”Deer Run’s 6.5- to 9-ft thick coal seams dip slightly and have a soft clay bottom. “Some of our reserves approach a depth of 600 ft, though most have from 350 ft to 550 ft of overburden. It’s a sweet reserve.” The seams will be accessed through an incline slope and two vertical shafts, very similar to Sugar Camp. Construction should commence next year on a prep plant, rail loop, load-out, truck loader and other infrastructure.Once again, in September 2009, NRP acquired another large coal block from Cline, this one approximately 200 million tons of coal to eventually be mined by Deer Run. These reserves were purchased from Colt, LLC, another Cline affiliate, and are being leased back to Hillsboro Energy. Initial production from Deer Run may come in late 2010 or early 2011 with the longwall to be fired up late that year or the next. Production from the Deer Run may eventually reach 8 to 10 million tpy with a mine life of roughly 20 years, according to NRP.

Piecing Together the Tea Leaves: Future Cline Build OutsOne might think that four mines and 25 million tons of production would be enough for one company to concentrate on. But then that’s not the play Cline seems to be settling for. With the possible exception of Shay, insiders note that Pond Creek, Deer Run and Sugar Camp are being constructed with the intent of tying them into other mines. One of these is the so-called Locust Grove mine that may develop reserves located east of Pond Creek and south of Sugar Camp. Once known as the C&H property, Amax controlled it for several years but it eventually reverted to RAG, whose lease expired in 2000. Following a reversion back to the owners of the former Penn Central railroad lands, Cline is now leasing it. While well short of approval, in April 2007, Locust Grove Energy, LLC, another Cline subsidiary, submitted a permit application for a 7-million-tpy longwall mine in Williamson and Franklin counties.Cline also had the Akin project, which is located in Franklin County, just east of Sugar Camp. Leased from the Tennessee Valley Authority (TVA) in 2002, this 100-million-ton reserve is under consideration for another 8- to 9-million-tpy longwall operation after Sugar Camp.An even more substantial reserve block, located due north of Sugar Camp, is the TVA Ewing property. Another billion-ton block, it had been controlled by the Addington’s Illinois Fuels that paid $5/acre per year for 55,000 acres in Franklin, Hamilton and Jefferson counties in 2002. When they fell behind the permitting process in 2009, Cline jumped in. Known as the Ewing block, some of the Nos. 5 and 6 seam coal (3.5 lb-SO2/MMBtu and 4.5 lb-SO2/MMBtu, respectively), was mined many years ago, but what remains is mostly a huge virgin deposit. “Cline has it now, and could potentially access it through Sugar Camp. Addington had planned a 6- to 7-million tpy coal mine on that property, it’s Cline’s to develop now,” said Hanou.South of Deer Run, Cline also controls a 120,000 acre, 900 million ton reserve in the Herrin/Illinois No. 6 seam in Bond County. Once controlled by Exxon/Chevron, 10 years ago, the oil giant paid Bond County around US$60,000 to take over the reserve. Then, in 2004, the county sold it to Cline’s affiliate, Colt LLC for $7.2 million with promises of additional royalties to the county. Cline hopes to eventually develop two longwall mines here with an anticipated production level of 14 million tons per year.

Chlorine Concerns and New Ways to Get to Old MarketsThough Illinois has tremendous bituminous coal reserves, only a fraction of what is mined is burned within the state’s borders, and that’s not likely to change dramatically in coming years. While several million tons of Pond Creek’s production (and eventually Sugar Camp’s as well) is being exported after being transloaded at the Consolidated Grain & Barge’s Mound City, Ill., rail-to-barge terminal and other regional transload facilities, Cline is no doubt banking on selling into the expanding domestic scrubbed power plant market. Also, with CAPP production declining as coal costs go up, Cline is certainly hoping to capture some of the customers the company used to sell to when they were solely West Virginia-based operators. To help facilitate and grow a new, larger customer base, the CN/IC and NS railroads recently announced the creation of the MidAmerica Corridor, a joint venture to create a new coal gateway at Corinth, Miss., to better link NS-served southeastern utility plants with CN-served Illinois Basin coal producers, the largest of which will no doubt be Cline. Coal will travel down the former IC mainline to Fulton, Ky., where it will travel southeast over the rehabbed West Tennessee Railroad (formerly the IC) to Corinth. From there the NS will take that coal east into Alabama, Georgia and other southern markets. “It’s a brilliant move, NS can compete with CSX that way for coal moving south out of the Illinois Basin,” said Hanou.However, one of the few downsides to Cline’s aggressive expansion is that some of its coal contains higher levels of chlorine, what some utilities believe to be a corrosive chemical present in some Illinois Basin coals. Potentially harmful to boilers and SO2 scrubbers, boiler manufacturers generally set a limit of 0.3% chlorine. Cline’s chlorine is estimated to be 0.3 to 0.4% on a dry basis, which means it has to be blended down for many customers. According to an Energy Publishing report, “Pond Creek No. 1 lost a major customer—Duke Energy Corp.’s East Bend plant—after a test burn showed its coal had too high a chloride content for the plant’s scrubber systems to handle.” Thankfully, there is a quite a bit of low to ultra-low chlorine coal pockets in southern Indiana and western Kentucky, some at levels of less than 0.1%, that would make excellent blending stock.

Too Much Too Soon?Aware that this is the first wave of the Illinois Basin’s comeback, several analysts worry that Cline is expanding too much too soon. Combined with Alliance Resource’s expansion among others, the amount of coal about to come on market “is way beyond what the market can bear. It’s going to be brutal competition going forward in the Illinois Basin,” said Hanou. Cline representatives reply to this charge by shrugging off those concerns, confident that the market will be there for all of this coal and more. According to another Energy Publishing report, Cline actually has plans to develop up to 60 million tpy of coal production out of Illinois in the next few years.“Maybe they can pull it off,” Hanou said. “Cline is very unique and innovative. By all accounts they run a first class operation. But more importantly, the world belongs to the low-cost producer, and that seems to be them,” said Hanou. Though they have other potential mines on the drawing board, conventional wisdom is that these are going to be the only four mines Cline builds for the time being. But then again, conventional thinking didn’t get the Cline group this far and there’s no reason to think it’ll adopt a conservative approach anytime soon. With hundreds of Illinois miners, contractors, and suppliers scrambling to stay on Cline’s tight schedule, not only is the Great Recession a little more remote locally, but it’s starting to seem like King Coal is marching back to his southern Illinois throne.

Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at www.lmbphotography.com or by phone at 303-746-8172.

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